German Big Pharma Lays Cards on Table as Bayer, Merck, Altana Release Q1 Results

Little and Large

Germany’s Bayer AG and Merck KGaA - two drug-makers with very different operating models and revenue levels - released their first-quarter financial results today. For Bayer, group sales over the first three months of 2006 rose by 11.8% year-on-year (y/y) to 7.5 billion euro (US$9.3 billion) on a reported basis, converting to a 5.8% increase in comparable terms. The company’s pharmaceutical unit, Bayer HealthCare, drove the bulk of the growth, with a 20.9% y/y rise in sales to 2.6 billion euro. For the company as a whole, operating income (defined as EBITDA – earnings before interest, taxation, depreciation and amortisation) grew by 8% y/y to reach 1.6 billion euro. In the HealthCare subgroup, EBIT improved by some 37.7% y/y over the first quarter, at 416 million euro.

Merck KGaA, meanwhile, saw a 16% y/y jump in its first-quarter sales, which reached 1.6 billion euro for the company as a whole. Unlike Bayer, Merck’s Pharmaceutical division recorded the weakest degree of sales growth of all three of its units, although its 15% y/y increase saw the Merck subgroup reach a personal milestone after surpassing the 1-billion-euro mark for the first time. Earnings before interest and taxes (EBIT) for Merck as a whole grew by double-digit levels (36.9% y/y) to reach 260 million euro. Some 19 million euro in fees from Merck’s aborted attempt to acquire German rival Schering AG in March were written off as a one-time cost (see Germany: 24 March 2006: Bayer Trumps Merck as Schering AG Accepts Higher Counter-Offer)

No Pipeline Surprises, But Some Secrets Remain

Over at Merck, pharmaceutical sales in the Ethicals division continue to be dominated by cancer drug Erbitux (cetuximab), which clocked up 74 million euro in first-quarter sales, increasing by 14% from the previous quarter. Type 2 diabetes-treatment Glucophage (metformin) saw a 7.9% y/y increase in first-quarter sales to 65 million euro, while Merck’s cardiology franchise - led by Concor, Lodoz and ConcorCOR – expanded by 23% y/y to 92 million euro. Curiously, Bayer has stopped short of releasing precise first-quarter sales figures for its leading drugs. It has, however, revealed strong growth in each segment of its HealthCare division. Since 1 January, Bayer HealthCare has been split into three business units, consisting of Primary Care, Haematology/Cardiology and Oncology. Modest growth of 9.6% in the Primary Care business has been attributed to antibiotic Avelox (moxifloxacin hydrochloride) and erectile-dysfunction treatment Levitra (vardenafil), while more encouraging revenue growth of 54.3% was noted across the Haematology/Cardiology and Oncology units, owed to reportedly strong sales of haemophilia-drug Kogenate (anti-haemophilic factor, recombinant factor VIII) and the recent U.S. launch of kidney-cancer drug Nexavar (sorafenib), following its FDA approval late last year (see Germany: 21 December 2005: FDA Approves Bayer's Nexavar for Kidney Cancer).

Outlook and Implications

Both companies have performed reasonably well over the first three months of 2006, and indeed, both have surpassed industry expectations. However, while Merck KGaA has arguably seen a better quarter as a whole, its pharmaceutical sales lack the same punch as those clocked up by Bayer AG. This looks set to characterise the rest of the year, because while Merck will gain significant extra revenue from additional indications for Erbitux (see Germany: 3 April 2006: Merck KGaA Secures Erbitux EU Approval in Head and Neck Cancer Indication), it is Nexavar that has been touted as a blockbuster in its own right (see Germany: 21 December 2005: FDA Approves Bayer's Nexavar for Kidney Cancer). Competition with Pfizer (U.S.) drug Sutent (sutinib malate) will, however, affect the drug’s initial performance. Merck is expecting double-digit profit growth to continue throughout the year, although the company appears to be increasingly focusing its attention on its rapidly-expanding Liquid Crystals division, which saw y/y sales growth of 60% over the first quarter, indicating a possible scaling-down of its pharmaceutical research and development (R&D). Bayer, meanwhile, is predicting a 19% operating (EBITDA) margin for the full year 2006, although this figure excludes the heavy effects anticipated from the planned takeover of Schering AG later this year.

In relation to Schering, it seems fairly certain now that Bayer is the more suitable merger partner and despite limited late-stage pipeline activity at both companies, hopes remain high for a successful future for the merged entity. With Schering’s multiple-sclerosis (MS) blockbuster, Betaferon/Betaseron, due to lose patent protection by the end of the decade, Bayer will need to find a replacement product in order to fill the sales gap. Bayer currently markets the cannabis-based MS treatment Sativex (manufactured by the U.K.’s GW Pharmaceuticals) in Canada, the only market to have approved the drug so far. Its eventual approval elsewhere could see more marketing revenue for Bayer if GW chooses to extend the licensing deal to other countries, although Bayer will remain more closely focused on its core cardiovascular and oncology projects. To this end, Bayer is planning to use the upcoming merger to its advantage by employing Schering’s U.S. sales force for promoting Nexavar to specialist physicians in the United States.